Largest Tax Cut in History?

Will the Republican tax plan be the “largest tax cut in history,” as the Trump administration has repeatedly said? That’s still unknown. But past tax cuts have been larger than cost estimates of the GOP plan.

President Donald Trump and others in the administration have been making the “largest tax cut” claim for months. We wrote about a Trump-for-president campaign committee TV ad that made the claim in May. The president made the boast again on Sept. 27, the day the White House and GOP leaders released the framework of their tax plan, and, among many other examples, he repeated it on Twitter on Oct. 18, saying: “Hopefully, all Senate Republicans will vote for the largest Tax Cuts in U.S. history.” White House Press Secretary Sarah Sanders tweeted the talking point 10 days later.

But so far, the White House hasn’t supported that claim and did not respond to our request for information.

The tax plan is only a framework, with many details yet to be filled in. It would reduce the corporate tax rate from 35 percent to 20 percent; abolish the alternative minimum tax; collapse the seven income tax brackets, which range from 10 percent to 39.6 percent, to three (12 percent, 25 percent and 35 percent); increase the standard deduction but eliminate exemptions; eliminate most itemized deductions except for mortgage interest and charitable giving; increase the child tax credit; and abolish the estate tax.

The Committee for a Responsible Federal Budget said it “very roughly” estimated a $2.2 trillion cost over 10 years. (That’s similar to the Tax Policy Center’s estimate of a $2.4 trillion cost over 10 years.)

“That would make this tax cut the 8th largest as a percent of Gross Domestic Product (GDP) since 1918 and the 4th largest in inflation-adjusted dollars,” CRFB wrote in an Oct. 25 blog post.

CRFB used a Treasury Department analysis that we also have referred to in the past. The 2013 report, by tax analyst Jerry Tempalski, detailed the revenue effects of major tax legislation. (Tempalski prepared such a report in 2006, and updated the tax tables in 2011, too.)

The latest report shows that the “largest tax cut in history” designation would go to either President Ronald Reagan’s 1981 tax cut or President Barack Obama’s 2012 extension of most of the George W. Bush-era income tax cuts, depending on how the size of the tax cut is measured.

As we’ve written before, the best measurement is the revenue effect as a percentage of gross domestic product. Tempalski wrote in 2006 that this measure “eliminates the effects of inflation, real economic growth, and the size of total federal receipts.” Over a four-year average, the revenue effect of Reagan’s 1981 tax cut was 2.89 percent of GDP. (Reagan’s cut also had the largest impact as a percentage of federal receipts over a four-year average.) That’s the most of any tax cut in the Treasury report, going back to 1940.

Using CRFB’s cost estimate for the current Republican tax plan, the average revenue effect would be 0.9 percent of GDP over the 10-year period. That’s also lower than tax cuts implemented in 2010 and 2013, as well as those in 1948, 1945 and 1964, with the last three measured over just one year. (The Treasury report includes the four-year averages for tax measures since 1978, but uses shorter periods for prior years.)

The CRFB analysis relies on a 2012 paper by University of California, Berkeley economists to look at pre-1940 tax cuts. That puts one more tax measure, in 1921, above the latest GOP proposal in terms of percentage of GDP.

The GOP plan would have to be doubled or tripled in order to surpass the 1981 tax cut, CRFB said. “If President Trump wanted to pass a tax cut that exceeds the record 2.9 percent of the economy in 1981, it would cost roughly $6.8 trillion over ten years.”

We could also look at tax cuts in terms of inflation-adjusted dollars. By that measure, the American Taxpayer Relief Act of 2012 (implemented in 2013) tops the list, costing $320.6 billion in 2012 dollars over a four-year average. The GOP tax plan would come in at $190 billion on an annual average in 2012 dollars, CRFB found. That would be the fourth largest tax cut — also behind tax reductions in 2010 ($210 billion) and 1981 ($208 billion).

Using inflation-adjusted dollars “tends to have a bias towards recent tax cuts since the tax base usually grows faster than inflation,” CRFB says, noting that percentage of GDP is the “better way to compare costs over long time periods.”

As we said, the GOP tax framework is still missing some details. The final tax bill hasn’t yet been written, although it may be released as early as Nov. 2. But the Trump administration’s claim of the “largest” tax cut in history remains unsupported, and disputed by budget experts.

The plan may be limited to a cost of $1.5 trillion over 10 years, if lawmakers adhere to a Senate budget resolution that allowed for such an increase to the deficit to pay for the tax cuts. That would move the tax plan further down the list of the largest tax cuts in history.

Update, Dec. 6: The final legislation, released and passed by the House and Senate, would still not be the largest tax cut in history: The GOP plan still comes in eighth or fourth place, as measured by a percentage of gross domestic product or in inflation-adjusted dollars, respectively.

The House legislation as released was estimated by the nonpartisan Joint Committee on Taxation to cost $1.49 trillion over 10 years. Over the first four years, the average annual cost would be $185 billion or about 1 percent of GDP. And an amended House bill was about the same — $1.44 trillion over 10 years, and an average $190 billion over the first four years. The final Senate bill would cost $1.45 trillion over 10 years, or $179 billion over the first four years on average, the JCT said.